Trade secrets and other confidential information play an important role in the operation of every business. A trade secret is business or technical information that: (a) is not generally known to or derivable by those in the field to which it pertains; (b) is maintained in secrecy; and (c) provides its owner with an economic advantage by virtue of it not being generally known.
Common examples of trade secrets include certain confidential customer lists, marketing plans, manufacturing processes and tolerances, recipes, and formulas. All trade secrets are confidential information, but not all confidential information rises to the level of a trade secret.
Let’s look at the factors defining trade secrets more closely.
To qualify as a trade secret, the confidential information must not be generally known to or derivable by those in the field to which it pertains. As such, a confidential process that is not generally known might qualify as a trade secret, but secret use of a known process probably would not – unless the known process is used in an unconventional way or to achieve an unconventional result. Also, a carefully developed (and confidential) customer list might qualify as a trade secret, but a list of customers simply copied from a publicly-available telephone listing probably would not. Confidential technical information that is incorporated into or used to make a product could qualify as a trade secret, so long as the information could not be readily derived by inspection or reverse-engineering the product. On the other hand, if the technical information could be readily derived by inspection or analysis, it probably would not qualify as a trade secret.
To be maintained as a trade secret, the confidential information must be held in secrecy. Once a trade secret has been disclosed to the public, its trade secret status cannot be recaptured. Although state and federal laws provide certain remedies for misappropriation of trade secrets, courts are not likely to award such remedies unless the trade secret owner can show that it took reasonable steps to maintain secrecy. Reasonable steps include, but are not limited to:
- Documenting trade secret information and the fact that the trade secret owner considers it to be trade secret information.
- Marking all documents and things including trade secret information with a proper confidentiality notice.
- Restricting access to tangible trade secret information by keeping it locked up.
- Restricting access to electronic trade secret information by keeping it password protected, copy protected, and/or encrypted.
- Restricting access to facilities where the trade secret information is implemented.
- Limiting disclosure of trade secret information to those with a need to know it.
- Requiring employees receiving trade secret information to acknowledge and abide by a duty of confidentiality.
- Avoiding any disclosure of trade secret information to third parties absent a non-disclosure agreement requiring the recipient to acknowledge and abide by a duty of confidentiality.
- Avoiding unwritten disclosure of trade secret information to third parties absent a non-disclosure agreement requiring the recipient to acknowledge and abide by a duty of confidentiality and a written acknowledgment that the unwritten disclosure is deemed to be trade secret information controlled by the agreement.
- Implementing policies and procedures directed to maintaining secrecy of trade secret information.
Finally, a trade secret must provide its owner with an economic advantage by virtue of it not being generally known. Information that does not provide an economic advantage, such as outdated financial information or obsolete technical information, is not likely to qualify as a trade secret.
Even best practices are not always enough to prevent others from misappropriating trade secrets. In such cases, state and federal trade secret laws may provide remedies for the misappropriation. Most states have adopted the Uniform Trade Secrets Act or a variation of it. The Defend Trade Secrets Act (DTSA), a federal trade secret law that was enacted in 2016, provides an avenue for trade secret disputes to be heard in federal courts. Both state laws and the DTSA provide for monetary and injunctive relief. The Economic Espionage Act (EEA), another body of federal trade secret law, provides for criminal penalties for certain types of trade secret misappropriation, although cases under the EEA may be brought only by the federal government.
That said, no remedy for trade secret misappropriation can put the genie back into the bottle. Once a secret is out, it’s out forever. As such, when it comes to protecting trade secrets, the best defense is a strong offense.
One such offense involves conducting an internal trade secret audit that identifies an organization’s trade secrets and analyzes the policies and procedures in place to protect them. With this as a starting point, any apparent weaknesses in those policies and procedures can be addressed and resolved to provide a better level of security for protecting the organization’s trade secrets.
This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.
Barnes & Thornburg LLP is a large, full-service law firm that seeks to take a more entrepreneurial and cost-effective approach both to client service and its own business.